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The Taxing Question of Overseas Property

NICHOLAS NEWMAN 31 August 2006

Did you know that at least 257,000 Britons now own an overseas holiday home?

With a strong pound and booming economy, it looks like many more of us are joining the likes of Cliff Richard and are buying a place in the sun. It appears, we ‘…British have beaten the Germans when it comes to throwing our metaphorical towels over foreign rooftops,’ says John Barnes, of Newfound Property International. But what a lot of Britons seem to forget, is that just because they are away from home, does not mean, that the taxman has forgotten them. It just means it won’t probably be British taxman you will be paying, but a foreign tax official.

For the buyer, it will not only be property prices and the location that will matter but, also, the respective tax regime of the foreign country of choice. Just as in Britain, owning a home abroad does not make you free from taxes for example such as Capital Gains Tax (CGT), Inheritance Tax and Tax on Rental Income in the country of your choice!

Tax on Rental Income

For example tax on rental income, for many with the possibility that they can earn an income from renting out their overseas property, is seen as an added attraction. However, as Justin Rix, tax specialist at Grant Thornton explains, ‘tax on rental income can vary from as low as 15% in Bulgaria, to 43% for higher rate taxpayers in Italy.’

In Spain income earned from rent (Renta) is presently set at 1.1% or 2% of the Valor Catastral (assessed value of the property), depending on whether the Valor Catastral has been revised since January 1994. This amount is considered as an imaginary yearly income and taxed accordingly at 25%. Any rental income has to be declared in the UK, but due to the Double Taxation Treaty, taxed income in Spain is not liable for income tax in the UK.

Capital Gains Tax

While for those considering buying an overseas property for investment purposes, just like at home, you are liable to CGT, a tax on the increased value that has accrued in the period of their ownership. They will also have to take into consideration any currency fluctuations that can make a profit in the local currency into a sterling loss.

Spain for example, a country well known for tax avoidance by foreign national’s resident along its Costa’s. David Handyman, a fictitious Oxfordshire businessman, bought a five bedroom villa for €200,000 (£135,058).some years ago, and suppose he now wants to sell it. Kyero (Spanish property price guide) quotes a price for his 5 bedroom holiday home in Malaga at €312,000 (£210,000). Currently David could be paying up to 35% in CGT on the profits he has made. Though the actual amount of CGT you pay is reduced by an allowance of 11.1% a year on the number of years you have owned the house since 1996. Any seller who is over 65 and has been a legal resident in Spain for the last three years does not have to pay this tax. By the way the old ploy of declaring a lower selling price than was actually paid, in order to reduce the amount of Capital Gains Tax is becoming less feasible as the Spanish Treasury’s Inspectors are tightening up. If they find the property undervalued, the seller could be liable to be fined.

Inheritance Tax

As for Inheritance Tax, the percentage you will pay will depend on the country in which your holiday home is located, and as in Britain as difficult to escape. However, owning a property abroad could restrict your freedom of action when disposing of your overseas assets, since many European countries restrict how assets can be divided up amongst heirs, reports Justin Rix.

In Spain, when it comes to inheritance tax, the amount the recipient pays is dependent on which tax group the beneficiary is in, with children paying as little as 7% and non relatives up to 34% on the value of the share of the Spanish estate they inherit. It is advisable for people like David Handyman to make a separate Spanish Will dealing exclusively with his Spanish estate, as it will make it easier for his executors to deal with the Spanish authorities in disposing of his estate. A Spanish Will can be signed in England or in Spain, but must be registered at the Spanish Central Registry of Wills.

Time to Do Your Homework

So before you choose that place in the sun, to invest or holiday in you will need to do your home work on the country’s tax regime, because that place in the sun could soon turn into a tax nightmare. A good place to start is AngloINFO (a free information site for investors) and you will need to consult an expert like Justin Rix, tax specialist at Grant Thornton to anticipate and sort out any unexpected tax liabilities.